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Can Saudi Arabia Scramble Out Of The Pit It Dug for Itself?

Major changes are brewing in Saudi Arabia, and there is no way to stop them if the kingdom’s economy is to survive the oil price rout. This is what has become painfully clear after last week, Deputy Economy Minister Mohammad Al Tuwaijri slammed the country’s bureaucracy for being lazy and inefficient, stressing that the economy is far too oil-dependent. He added that, were it not for cost-cutting measures taken by the government, the kingdom would be bankrupt within four years.

Although Al Tuwaijri later apologized for these remarks, saying “bankruptcy” was too strong a word, he noted that Saudi Arabia did indeed have a “structural economic problem,” an expression some would consider a massive understatement, but understandable in the context of the culture.

Saudi Arabia has not had to deal with a budget deficit for decades, but last year it had a deficit equal to 16 percent of its GDP, and this year it’s estimated to stand at 13 percent. Leaving aside obvious conclusions (such as the Saudi oil market-share protection strategy backfired spectacularly), these deficit figures prompted the government to scramble to implement major reforms, in what the IMF called the biggest economic shakeup in Saudi Arabia’s history.

But major reforms take time, especially in Saudi Arabia. As the FT notes, nothing happens quickly in Saudi Arabia. And public servants in Saudi Arabia have already complained loudly about pay cuts and even the introduction of a long overdue and sensible punctuality system, aimed at improving attendance at a municipal office in Madinah.

Under the new “system”, employees would be required to clock in with their fingerprint five times a day at their workstation, to make sure they’re really there. The measure was adopted partially out of necessity to drastically improve efficiency in the wake of Saudi’s crumbling economy, and partially after accusations were made that the average Saudi public sector employee works less than an hour a day.

Al Tuwaijri, who was appointed to the Ministry of the Economy this spring after a stint at HSBC as the head of its Middle East and North Africa business, seems unmoved by these complaints and the resentment of his colleagues over remarks about large-scale infrastructure projects that were “a luxury” the kingdom could no longer afford. Related: Nigerian Oil Under Attack Once Again

Many of these large projects are currently under review, their combined value reaching US$69 billion. At the time the review was first reported in September, there was a chance that a third of them would be canceled, saving the budget around US$20 billion, which amounts to a short-term lifeline for Saudi Arabia. The IMF warned at the time that the kingdom was depleting its financial reserves at an uncomfortably fast rate, and on track to drain its oil coffers within five years unless steps were taken to slow this pace.

The austerity measures introduced by the government do seem to have slowed the rate of decline, and the IMF now expects the Saudi economy will just about manage to avoid recession this year, with GDP inching up by a mere 0.3 percent, and forecasts more recovery to come in 2017. The IMF also noted that to balance its budget, Saudi Arabia would need oil to be at $79.70 a barrel, down from the necessary $92.90 in 2015. Brent is currently trading somewhere near the $50 mark. Related: Could An Intense Winter Fuel The Oil Price Rally?

So unless oil climbs by $30 per barrel, any recovery that Saudi Arabia does make will be by way of austerity reforms. This will have a negative impact on GDP growth: the cuts in fuel subsidies and the reduction of public servants’ salaries by 20 percent will take their toll on the locals’ spending power, slowing down recovery.

The reforms, as laid out in the Vision 2030 plan released earlier this year, are aimed at long-term economic diversification to reduce the country’s reliance on crude oil exports. There is no alternative to this diversification, because even Saudi Arabia’s non-oil exports are oil-based: fuels and plastics, mostly.

As for how these ambitious goals will be pursued and what the chances of their successful accomplishment are, it’s difficult to say. Rooting out such a fundamental dependency will be a challenging task, all the more so if oil prices start going up again, with the lure of petrodollars far too juicy to resist.

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The boomerang effect they got. I don't think they can diversify their economy over the night. You need an educational system, experienced and trained people...accordingly.

Bud on October 26 2016 said:

Where does the 80 dollar/barrel break even number come from. Does this assume they sell 10.5 mbpd or 9 mbpd or something in between?

At 9 mbpd they will likely get 90 dollar oil and this would represent about 100 billion more in revenues than 10.5 mbpd at 50 bucks, and this is about what they are burning in reserves in a forward annualized look.

The frackers in Texas are no longer the target, if they were the prime target to begin with. The target now is clearly long lead deep water and frontier projects and fields with high operating costs, such as the North Sea and Artic.

To this end, they will need to keep Brent in the 50-60 dollar range until the 2017 budgets are well in place and the independent international oil majors continue to scrap deep water and frontier long lead projects.

As Russian production levels in the next 12 months, ARAMCO will be able to pull back with help of the winter season. Maybe they won't get the agreements they want in November, but if they stand their ground, oil will go back into the 30's next year and the desperation that will cause in OPEC specifically could cause prices to overshoot by 2018-2019.

Therefore, we can expect the GCC countries to agree to pull back production slowly, but surely, in an orderly fashion. However, there may not be alot of confirmation of this until well into the second quarter next year.

Jack Ma on October 26 2016 said:

Great article.

The only thing worse than stage 4 cancer is to know you have it and that your days are numbered. Once this incremental revelation takes hold, the mind breaks and heaven can become hell.

Metaphorically speaking, Saudi knows that they are dying and that there is nothing now that can be done about it. There is no alternative economy, and austerity even to the point where the people are handing over pints of their own blood will no slow the demise.

This momentum collapse can not be stopped and Saudi has long lost the privilege of even being the swing producer. Iran eagerly awaits for the moment of maximum weakness to strike. In a ironic twist of fate, the heads that soon roll will be that of the Saudi Royal family's own. Chop Chop.

Better to have never known that the cancer has metastasized. The only chemotherapy now is to de-peg from the dollar AND start selling oil in Euros and Yuan and Ruble too. This double therapy is near, but still probably to no avail as the USA will walk away from the point of the first attack from Iran. I am thinking that the USA will not have to pay the Saudi Family the trillions owed. Nothing like killing off your own creditor maybe?

The day of reckoning in which the tyrants pay the piper is ever near. Saudi is doomed and this my friends is a foregone conclusion. You can take that to the central bank, or the IMF.

Warmest regards to all and have a blessed day.

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